Pesec v Consolidated Builders Ltd (No 7)
[2022] ACTSC 244
•9 September 2022
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Pesec v Consolidated Builders Ltd (No 7) |
Citation: | [2022] ACTSC 244 |
Hearing Date: | 9 August 2022 |
DecisionDate: | 9 September 2022 |
Before: | McWilliam AJ |
Decision: | In proceeding SC 179 of 2020 1. A gross sum costs order is made in the sum of $384,000. 2. Each party is to bear their own costs of the application filed 10 May 2022. In proceeding CA 18 of 2021 1. In proceeding CA 18 of 2021, a gross sum costs order is made in the sum of $66,000. 2. Each party is to bear their own costs of the application treated as filed on 10 May 2022. |
Catchwords: | PRACTICE AND PROCEDURE – COSTS – Gross sum costs order – application for costs to be fixed where plaintiff previously ordered to pay defendant’s costs – where formal assessment of the defendant’s costs would be protracted and expensive – whether defendant incurred costs in anticipation of proceedings |
Legislation Cited: | Civil Procedure Act 2005 (NSW) s 3 Corporations Act 2001 (Cth) ss 237, 239 Uniform Civil Procedure Rules 1999 (Qld) r 679 |
Cases Cited: | Andy Vuong Duc Pham v Enterprise ICT Pty Ltd [2020] NSWSC 1089 Blake v Norris (1990) 20 NSWLR 300 Simone Starr-Diamond v Talus Diamond (No 4) [2013] NSWSC 811 |
Parties: | Anthony Pesec (Plaintiff/Respondent) Consolidated Builders Limited (Defendant/Applicant) |
Representation: | Counsel M R Pesman SC (Plaintiff/Respondent) I Ahmed (Defendant/Applicant) |
| Solicitors Chamberlains (Plaintiff/Respondent) Clayton Utz (Defendant/Applicant) | |
File Numbers: | SC 179 of 2020; AC 18 of 2021 |
McWilliam AJ
It need hardly be said that litigation can be expensive. Working out the costs after a dispute is resolved can be a further time consuming and complex task, itself adding to a litigation money pit for the hapless litigant who must foot the bill. The two parties to the present application have been involved in various legal proceedings in this court spanning more than three years. Following the conclusion of those proceedings the defendant in this proceeding, Consolidated Builders Limited (CBL), has the benefit of a series of costs orders made in its favour against the plaintiff, Mr Anthony Pesec.
The parties have since spent further costs trying to agree the quantum of costs. Having failed to reach an agreement, the parties have returned to court.
CBL says that it has incurred more than $1.26 million in solicitor and client fees and disbursements. By application under r 1720(3)(c) of the Court Procedures Rules 2006 (ACT) (Rules), it applied to the Court to have the costs payable by Mr Pesec fixed rather than assessed in the ordinary way. The amount of party and party costs, as ultimately sought at the hearing, is $569,925.12 (amended from $567,296.00 in the application).
Mr Pesec does not oppose fixing the costs payable but does oppose the quantum sought. He contended in written submissions that the gross sum should be fixed at a total of $309,317.37.
The litigation giving rise to the application to fix costs
Filed on 10 May 2022, the application to fix the costs payable by Mr Pesec relates to costs orders made in three separate proceedings.
Proceeding SC 181 of 2019
The first proceeding concerned an application for preliminary discovery. Mr Pesec obtained orders for preliminary discovery against CBL on 5 June 2019: Pesec v Consolidated Builders Ltd [2019] ACTSC 142.
Subsequently, on 17 June 2019, Mr Pesec was ordered to pay 75% of CBL’s costs of that application, for reasons set out in Pesec v Consolidated Builders Ltd (No 2) [2019] ACTSC 157.
Mr Pesec later sought to set aside those costs orders, but the application (brought in the second proceeding, SC 179 of 2020) was dismissed on 9 September 2021: Pesec v Consolidated Builders Ltd (No 5) [2021] ACTSC 225.
CBL then applied for indemnity costs in relation to the application brought by Mr Pesec to set aside the costs orders of 17 June 2019. The application for indemnity costs was dismissed on 30 September 2021, with Mr Pesec ordered to pay CBL’s costs on the ordinary party and party basis: Pesec v Consolidated Builders Ltd (No 6) [2021] ACTSC 250 (Pesec No 6).
Mr Pesec has since paid the costs of the preliminary discovery as ordered on 17 June 2019 (and since assessed and determined by Registrar Kennealy) but has not paid the cost of the application to vary the preliminary discovery costs order, which was determined on 9 September 2021, and the costs order ultimately made on 30 September 2021.
Proceeding SC 179 of 2020 (the derivative action proceeding)
The second proceeding concerned an application by the plaintiff for leave to bring a statutory derivative action on behalf of CBL, which was dismissed on 28 May 2021: Pesec v Consolidated Builders Ltd (No 3) [2021] ACTSC 105 (Pesec No 3). In what follows, some knowledge of what that proceeding was about is assumed. By way of brief overview only, Pesec No 3 concerned whether Mr Pesec had established a number of statutory criteria under s 237 of the Corporations Act 2001 (Cth) (Corporations Act). The parties were in dispute about whether Mr Pesec was acting in good faith, whether it was in the best interests of CBL for leave to be granted, and whether there was a serious issue to be tried: see Pesec No 3 at [11]-[12].
Following dismissal of the application, orders were made on 19 August 2021 for the plaintiff to pay 75% of the defendant’s costs of the proceeding: Pesec v Consolidated Builders Ltd (No 4) [2021] ACTSC 188 (Pesec No 4).
Proceeding AC 18 of 2021
The third proceeding concerned an application by Mr Pesec for leave to appeal the decision in Pesec No 3. That application was dismissed on 20 September 2021 and he was ordered to pay CBL’s costs of the application: Pesec v Consolidated Builders Ltd [2021] ACTCA 25 (Pesec Appeal).
Costs that the defendant seeks to have fixed
Following the litigation history outlined above, the applications to fix costs relate to the following costs orders:
(a)In proceeding SC 179 of 2020:
(i)An order made on 19 August 2021 that Mr Pesec pay 75% of CBL’s costs in relation to the derivative action proceeding (Pesec No 4)
(ii)An order made on 30 September 2021 that Mr Pesec pay the costs of the application in proceeding seeking to set aside the earlier costs order in relation to the preliminary discovery proceeding (Pesec No 6).
(b)In proceeding AC 18 of 2021, an order made on 20 September 2021 that Mr Pesec pay the costs of the appeal (Pesec Appeal).
That will dispose of the entirety of the costs disputes between the parties both at first instance and on appeal.
The Court’s power to fix costs
The applicable rule, at r 1720 of the Rules, is as follows (notes omitted):
1720 Costs—entitlement to recover
(1) A party to a proceeding cannot recover any costs of the proceeding from another party or anyone else otherwise than by agreement, under a territory law, or an order of the court under a territory law.
(2) If, under a territory law or an order of the court, a party is entitled to costs, the costs are to be assessed costs.
(3) However, instead of assessed costs, the court may order a person liable for costs to pay to the party entitled to costs—
(a) a stated part or percentage of assessed costs; or
(b) assessed costs to or from a stated stage of the proceeding; or
(c) an amount for costs decided by the court; or
(d) an amount for costs to be decided in a way the court directs.
There may have been uncertainty about whether a court at first instance had jurisdiction to deal with whether to fix the costs payable under a costs order made in the jurisdiction of the Court of Appeal. That issue has been resolved through consent orders made prior to the hearing of the application, which provided for the same application to fix costs to be made in the Court of Appeal proceeding AC 18 of 2021, with evidence filed on the application made in the derivative action proceeding also constituting the evidence in relation to the appeal proceeding.
The Court’s power to fix costs (exercised through a hearing before a single judge) is to be found in s 37J(1)(l) of the Supreme Court Act 1933 (ACT). Although the parties argued each application consecutively during the one hearing, as a matter of formal procedure and jurisdiction there were in fact two hearings. Similarly, although only one set of reasons applying the same principles has been produced for convenience, what follows in terms of the principles to be applied should be understood as applying separately to each application in proceeding SC 179 of 2020 and proceeding AC 18 of 2021.
Is it appropriate to make a fixed costs order?
In addition to r 1720, s 5A of the Court Procedures Act 2004 (ACT) (Court Procedures Act) is also relevant. It provides for the Court to apply the civil procedure provisions, under which the Rules are made, in a way that best promotes the main purpose. The main purpose of the civil procedure provisions is described as being to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. The “main purpose” expressly includes as one of the listed objectives “the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute” (s 5A(2)(e)).
As the parties agreed on this aspect of the application, only brief reasons are necessary. The applicable principles have been discussed relatively recently in Polleycutt v Taylor [2020] ACTSC 158 (Polleycutt). For this case, it suffices to refer to part of what was set out at [8] (emphasis added):
… The purpose of the rule permitting [the Court to fix an amount for costs] is to avoid the expense, delay and aggravation involved in protracted litigation arising out of an assessment of costs: see Beach Petroleum NL v Johnson (No 2) [1995] FCA 1250; 57 FCR 119 (Beach Petroleum) at 120 …
CBL relied upon the affidavit of the solicitor with carriage of the matters, Mr Christopher Erfurt, sworn 6 May 2022, which exhibited critical documents such as judgments, the bills of costs that were prepared and the history of the costs negotiations. As will be apparent from the brief recitation of the history above, the parties here have been involved in litigation spanning a number of years. They have previously engaged in a costs assessment process in relation to the application for preliminary discovery. That appears to have taken two years to complete.
The evidence before the Court included a formal Bill of Costs which CBL had prepared for the costs order concerning the derivative action proceedings, for the initial purpose of the (unsuccessful) negotiations on costs. Those documents would then have been used in any assessment of costs. Mr Pesec in response has similarly obtained a costs consultant to review the Bill of Costs and provide expert opinions as to the quantum claimed under them.
I accept that the assessment process itself would be complex, would delay the finalisation of the dispute, and would add to the expense of the litigation for each party. In those circumstances, a gross sum costs order is appropriate.
Determining what amount is appropriate
Submissions of the parties
CBL summarised its total solicitor and client costs incurred in respect of each of the above proceedings as follows:
(a)$822,696.32 (being 75% of $1,096,928.42) in respect of SC 179 of 2020 (19 August 2021);
(b)$50,854 in respect of SC 179 of 2020 (30 September 2021); and
(c)$121,130 in respect of AC 18 of 2021 (20 September 2021).
The $569,925.12 sum sought by CBL (the combined amounts on the present applications) comprises the following:
(a)$276,255 in Professional costs; and
(b)$293,670.12 in Disbursements (including counsels’ fees).
CBL submitted that the fixed sum sought was appropriate, given that it represents 57% of the actual costs the subject of these costs orders. That sum was supported primarily by the detailed opinions of a costs assessor, Mr Kim Chapman, dated 9 May 2022 and 27 July 2022. Mr Chapman had also prepared the initial formal Bill of Costs pursuant to the costs order made on 19 August 2021 in the derivative action proceeding.
The appropriateness of fixing a sum in an amount that represents 57% of the actual costs was also supported by reference to the broad-brush approach discussed in a number of authorities: see Kostov v Zhang (No 2) [2016] NSWCA 279 at [53]; Guha v Guha [2020] NSWSC 1337 at [73]; Re Palladium Consulting Pty Ltd [2013] NSWSC 92 at [14]; Bobb v Wombat Securities Pty Ltd & Ors (No 2) [2013] NSWSC 863 at [11]; Simone Starr-Diamond v Talus Diamond (No 4) [2013] NSWSC 811 at [22]-[23]; Andy Vuong Duc Pham v Enterprise ICT Pty Ltd [2020] NSWSC 1089 at [72]; Coshott v Parker (No 3) [2015] NSWSC 1195 at [78]; Re Aquaqueen International Pty Ltd [2015] NSWSC 500 at [30]. From surveying those authorities, CBL argued that the typical discount range was 25% to 33%.
Mr Pesec submitted that the combined fixed sum payable was $309,317.37. In support of the arguments made, Mr Pesec relied on the opinions of Mr Duncan Harrington dated 1 and 20 July 2022. Mr Harrington is the Managing Partner at Canberra Costing Consultants and Harrington Hall Lawyers.
He submitted that the context of the litigation was important. The substantive proceeding of whether leave should be granted to bring a derivative action was heard over five days. The application for leave to appeal occupied one day of hearing time and the application to vary the costs order of the preliminary discovery proceedings was also concluded within a day. Mr Pesec argued that on any view, charging approximately $1.26 million in costs and disbursements for what occurred was extraordinarily high, and the fact that CBL only seeks approximately half that amount as against Mr Pesec does not establish that the amount claimed is reasonable.
Senior Counsel appearing for Mr Pesec further pointed out that the cases referred to at [27] above were for much smaller sums than what is involved in the present case. He argued that “careful scrutiny” was warranted because of the high legal fees incurred, and there were a number of categories where the costs claimed should be excluded as a matter of principal.
Otherwise, Mr Pesec accepted that the work was done as outlined in the Bill of Costs but contended that the work performed in some respects was excessive or disproportionate to what was required, and that the rates at times were also excessive.
Neither expert was cross-examined, which was the proper course given the nature of the application.
The applicable principles
The parties agreed that the applicable principles concerning the Court’s approach to the task of fixing a gross sum costs order were adequately summarised in Polleycutt v Taylor (No 2) [2020] ACTSC 321 at [12] (emphasis added):
(a) A gross or lump sum order is not the result of a process of assessment of costs. The Court does not undertake the detailed scrutiny normally reserved for formal assessments. The lump sum can only be fixed broadly, having regard to the information before the Court: Beach Petroleum at 124; Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd [2008] FCA 1051; and Harrison v Schipp [2002] NSWCA 213; 54 NSWLR 738 at [22]; cited in Andara Homes at [49].
(b) The evidence relating to the costs sought must be sufficiently detailed and must clearly identify the components of the costs incurred and how they have been calculated: Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus [2007] FCA 1878 at [26].
(c) To ensure that a weaker party is not disadvantaged by a lump sum costs order, the Court may adopt a careful and conservative approach to fixing the costs: Dunstan v Seymour [2006] FCA 917 at [25].
(d) The Court must be astute to prevent prejudice or injustice, either to the party ordered to pay the costs (by overestimating the costs), or to the successful party (by adopting an arbitrary “fail safe” discount on the cost estimates before the Court): Beach Petroleum at 124; cited in Andara Homes at [49].
(e) The Court may take into account that the costs should bear some relationship to the size of the applicant’s victory and should be proportionate to the nature and importance of the case: Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd [1998] FCA 23.
The parties further emphasised that the Court should not approach the task of fixing the gross sum as an assessment of costs nor undertake a line-by-line assessment.
But the parties also did not argue for a straight “discounting” approach. It may be accepted that adopting a broad, or “broad-brush”, approach to fixing a lump sum amount typically involves the application of a discount: see Idoport Pty Limited v National Australia Bank Limited and Ors, Idoport Pty Limited v Donald Robert Argus [2007] NSWSC 23 at [13].
The cases relied upon by CBL as demonstrative of a particular discount range involved costs that were fixed in significantly lower sums than the quantum under consideration here. That of itself may not be a reason to distinguish the application of the principle, but most likely because of the sums in issue, in none of those cases does it appear that the evidence was as comprehensive as that which is currently before this court, including detailed bills of costs prepared, followed by expert reports. The wording of the rule in NSW as to what costs are able to be included is also different (a matter dealt with specifically below).
In this case, the level of information that was available to the Court was not typical. Indeed, I consider it somewhat unusual for the Court to have the assistance of both a formal Bill of Costs and competing expert costs reports in an application to determine a lump sum costs amount. This produced detailed scrutiny of the amounts claimed which was strongly redolent of the assessment process. In drawing this distinction, I wish to lend no encouragement to what transpired in the present case as being the preferred course on a gross sum costs application.
Nevertheless, the distinction has a consequence for the applicability of the principle. In a case such as this, the rationale behind an approach where a discount is applied needs to be considered. These issues were considered in Hancock v Rinehart (Lump Sum
Costs) [2015] NSWSC 1640 (Hancock) at [56]-[57] (emphasis added, references omitted):
[56] The first defendant submits that there should be a further global percentage reduction of 15%, for two main reasons: first, because on assessment, even on the indemnity basis, a successful party invariably recovers something less than its actual costs, typically 15% where the assessment is on an indemnity basis; and secondly, the necessarily broad-brush approach of the court to assessment on a lump sum basis – involving some risk that the sum includes costs that would not be recovered on assessment – coupled with the savings to the costs creditor in time and costs through avoiding a detailed assessment, and the loss to the costs debtor of the opportunity to scrutinise and object to a detailed bill, has resulted in a practice of applying a discount on lump sum assessments.
[57] While it is undoubtedly the usual practice of the court when making a lump sum costs order to apply a discount for the reasons mentioned, that does not mean that the Court must apply a percentage discount to the sum sought by the successful party, and the Court "must be astute not to cause an injustice to the successful party" by applying "an arbitrary 'fail safe' discount on the costs estimate submitted to the court". Thus if the court can be confident that there is little risk that the sum includes costs that might be disallowed on assessment, the case for a discount is seriously undermined.
The reasoning in Hancock seems apposite to the circumstances here. The difficulty with taking a broad-brush discount approach in the present case was canvassed with CBL during the hearing. To the extent that the approach remained helpful, CBL submitted that the fixed sum sought was consistent with that range and provided a useful cross-check for the reasonableness of the expert opinion of Mr Chapman on which the sum was based.
It is important, however, that where the evidence and arguments in a particular matter such as the one before the Court do result in a more detailed assessment about the amount to be fixed than simply a broad-brush discounting approach, that the parties do not then view the process that may be undertaken by the Court in making a gross sum costs order as the lite version of a full assessment process. Arguments about numerous categories of documents by reference to the scale of costs in schedule 4 to the Rules are not appropriate when seeking to fix costs rather than assess them.
The costs payable pursuant to the order made on 19 August 2021
CBL submitted that the Court should fix the amount for costs payable under the order of 19 August 2021 at $465,132.12 in professional costs and disbursements. Mr Pesec submitted that the amount should be fixed at $239,779.23.
Many of the submissions made by Mr Pesec were more of the kind that would be made before an assessor. However, interwoven with that detailed scrutiny were also questions of principal, and the submissions were in part a product of the fact that there was a Bill of Costs relied upon in the application. Accordingly, the categories of dispute have been considered in turn below, although only to the extent that I consider it appropriate to do so in the context of the task of determining gross costs as opposed to assessing them.
Costs incurred before proceedings commenced
The primary point of principal over which the parties are in dispute is whether costs that were incurred before the proceedings commenced fall within the costs orders made. The disputed costs amount to $134,654.05.
That amount comprises a number of different components. One of those is work claimed in relation to an extraordinary general meeting held by CBL on 18 December 2019 (EGM). The proceeding seeking leave to commence a derivative action was commenced on 14 May 2020. CBL drew attention to the fact that the EGM was in direct response to the litigation threatened, and the relevance of the EGM to the proceeding, pointing to s 239(2) of the Corporations Act 2001 (Cth), which provides that the Court may have regard to any ratification in determining whether to grant leave to commence a derivative proceeding pursuant to s 237.
In addition to costs associated with the EGM, other components of pre-litigation costs claimed by CBL included (in summary):
(a)inquiries into concerns raised by Mr Pesec prior to litigation,
(b)the conducting of interviews with and preparing statements of persons relevant to the decision made on 14 April 2015 which was the subject of concern,
(c)providing advice as to how to respond to Mr Pesec’s concerns, and
(d)obtaining expert or technical advice necessary to inquire into and assess the concerns raised.
The issue is whether the work claimed falls within the scope of r 1700 of the Rules, which defines costs of the proceeding as follows:
"costs of the proceeding", for a proceeding, means costs of all the issues in the proceeding, and includes—
(a) costs ordered to be costs of the proceeding; and
(b) costs of complying with the necessary steps before starting the proceeding; and
(c) costs otherwise incurred for the purpose and benefit of the proceeding before starting the proceeding; and
(d) costs incurred before or after the start of the proceeding for successful or unsuccessful negotiations for settlement of the dispute.
CBL argued that the work claimed falls within paragraph (c) of the rule, as it was for the benefit of the proceeding. Mr Pesec argued that the work claimed extended back as far as 18 December 2018, meaning that part of the work that was done was in advance of the preliminary discovery application and was referable to that application, the costs of which have already been assessed. Mr Pesec also argued that the work done for the EGM, and costs incurred in investigating whether CBL would itself commence proceedings, were not properly characterised as work done for the benefit of the proceeding.
In Brennand and Naughton v Hartung and Best Practice Education Group Ltd t/as Blue Gum Community School [2014] ACTSC 326 (Brennand v Hartung) Refshauge J at [164] referred to a “wide and liberal approach” being taken to the costs provision under r 1700, although his Honour was there dealing with costs claimed under r 1700(d) and not with the present issue specifically.
The words used in subrule (c) do not appear to be replicated in other jurisdictions. Regulation 679 of the Uniform Civil Procedure Rules 1999 (Qld), on which the Rules were largely based, defines ‘“costs of the proceeding” to include (a), (b) and (d) of the definition in r 1700 set out above. There is no reference to costs otherwise incurred before a proceeding is commenced.
Nor can any assistance be derived from statutes such as the Civil Procedure Act 2005 (NSW) in New South Wales, which defines "costs" in s 3 as follows:
costs, in relation to proceedings, means costs payable in or in relation to the proceedings, and includes fees, disbursements, expenses and remuneration.
There are many ways to define ‘“proceeding”. In Blake v Norris (1990) 20 NSWLR 300, Smart J explained (at 306) that depending on the context, “proceeding” may mean the action itself or a step in the action. Here, the context of the rule must mean a step to progress or defend the action in court.
The meaning of costs has also been discussed by Griffith CJ in Potter v Dickenson (1905) 2 CLR 668 at 678-9, where his Honour referred to costs as including (among other things) “all necessary expenses of a party in establishing his case”. There is a distinction between the case or the action itself and establishing the case; between work done for the benefit of a party or action to which the proceeding relates, and work done for the benefit of the proceeding itself. The words of Griffith CJ are apt because they draw attention to costs being about what is necessary to establish the case. The focus is on the work done for the purpose of the proceeding, meaning steps taken in progressing the action.
I appreciate that might be a fine line to draw at times. Tasks such as the preparation of an affidavit, the drafting of a defence, or the undertaking of formal discovery are all clearly work that is for the benefit or progress of the proceeding. However, conducting an inquiry in response to a complaint by a shareholder with the knowledge that litigation might (or even will) follow is harder to justify as an expense that was incurred for the purpose and benefit of the proceeding itself. Even if statements are taken during such an inquiry, and those statements are then used as part of the materials on which an affidavit is subsequently based when proceedings were commenced, I would not accept that the initial inquiry and statement was work done for the purpose and benefit of the proceeding, as opposed to work done for the purpose and benefit of the inquiry at the time.
In the present case, the work that was done for the purpose of holding an EGM, and advice given about the EGM, was work done for the benefit of CBL and the cause of action it potentially faced. It was not work done for the purpose of the proceeding. CBL argued that the only reason the EGM was held, with associated legal and expert work performed in relation to it, was because of the threatened litigation. However, the fact that a company takes action in response to threatened proceedings does not mean that whatever is done constitutes action for the purpose and benefit of the proceeding. The reference to the statutory consideration in s 239(2) of the Corporations Act emphasises that the EGM was relevant to the statutory cause of action itself. The result of the EGM may have been of benefit to CBL as a party in the proceeding, but it was not work that was necessary to progress the proceeding itself.
CBL relied on the following comment in the initial report of Mr Chapman:
This bill…does not include all of the professional costs incurred by CBL such as work which is not arguably fair and reasonable between party and party. For example, …[w]ork done giving advice to CBL in relation to communications with shareholders at general or special meetings has also not been included on the basis that work was not done for the purpose or benefit of defending the application.
The difficulty is that Mr Chapman, in his second report, has taken a view that I have rejected, namely the view that the work done in relation to the EGM was done “for the purpose and benefit of the foreshadowed proceedings”. The categories of costs that Mr Chapman has considered to be fair and reasonable, as set out in that second report, include costs that were for CBL’s benefit in relation to the cause of action, rather than being for the purpose and benefit of the proceeding. That is clear from what is expressed by Mr Chapman in the report, an example of which is as follows:
The explanatory statement was prepared because the EGM proposed a resolution to notify the shareholders of [CBL] of the action [Mr Pesec] had foreshadowed taking. In this regard, section 239(2) of the Corporations Act provides that a court may take into account the ratification by shareholders of the Board’s decisions when considering an application under section 237. As the purpose of the meeting was to seek ratification of the Board’s decisions complained of, the costs claimed in the Bill of Costs are costs of and incidental to the proceeding.
The words “of and incidental to” are not the words used in r 1700 and demonstrate a misunderstanding of the distinction discussed above.
The result is that a significant proportion of the costs incurred before the derivative action proceeding was commenced are not costs within the scope of r 1700. As this is not an assessment, it is not appropriate for the Court to dissect the costs and disbursements incurred up to 14 May 2020. In any event, it is not possible to match the general statements of methodology by Mr Chapman with the descriptions set out in the bill of costs. I have been able to discern that some of the work done leading up to 14 May 2020 was within the scope of r 1700 and have allowed $40,000 as appropriately reflecting the work done.
The evidence of Mr Johnson
Mr Johnson was the independent auditor for CBL. Mr Pesec argued that the evidence of Mr Johnson was unnecessary mainly because it duplicated other evidence and did not feature in the reasoning in Pesec No 3. CBL argued that it was prepared in direct response to the plaintiff’s accounting expert, Mr Miller, who was of the view that CBL had not properly applied relevant accounting standards. CBL’s auditor was the appropriate person to give some evidence relevant to that question as he was the person intimately connected with what was done and why.
The cost in dispute is $7,191.05. I am not persuaded the preparation of the affidavit of Mr Johnson was not properly a cost of the proceeding. The sum was not otherwise suggested to be unreasonable and accordingly it will be allowed.
The evidence of two directors of CBL: Mr Skrnjug and Mr Cmkovic
Mr Skrnjug and Mr Cmkovic are directors of CBL. Mr Pesec challenges paying for the preparation of evidence where that evidence was not relied upon in the derivative action proceeding.
CBL argued that the directors were prospective defendants to the proposed derivative action. It was fair and reasonable that costs were incurred interviewing and taking witness statements from them in relation to the proceeding that sought to directly impeach their conduct.
The amount in dispute is $4,654.10. I accept that expenses incurred in preparing irrelevant evidence (as demonstrated by the fact that it was not read) should not be visited upon Mr Pesec. However, there is force in the submission that some investigations of the directors’ involvement in the decision-making process was necessary given the nature of the allegations. Balancing those competing factors, $3,000 will be allowed.
Costs of copying documents in connection with emails
Mr Pesec challenges $14,251.30 in costs connected with documents attached to emails. Mr Chapman’s explanation for that amount is that what has been claimed is in accordance with scale costs (Schedule 4 to the Rules, Part 4.1, Rule 4.3) and I have confidence the sum would be allowed in an assessment. Accordingly, the full sum will be allowed.
Costs said to be already claimed in the Bill of Costs for the preliminary discovery proceeding
The parties disputed an amount of $13,627.73. Mr Pesec submitted that the costs were already claimed or ought to have been claimed when the costs assessment for the preliminary discovery proceeding was undertaken (following Pesec No 2). CBL contended that, save for an amount of $59.10, the disputed costs amount related to the derivative action proceeding and not the preliminary discovery proceeding.
The sum in dispute relates to costs that were necessarily incurred before the derivative action proceeding was commenced. I have already found that pre-litigation costs will be significantly reduced. In light of the earlier reasoning, I consider this argument to have been overtaken, with such costs generally forming part of the amount that has already been excluded.
General care and conduct allowance
It is permissible under the Rules to claim what is described as an allowance for general care and conduct (see schedule 4, part 4.1, rule 4.1). In the present case, CBL claims an allowance of $56,305 or 65% applied to the “Instructions for Brief/Preparation for Trial” section of the bill of costs. Mr Pesec argues that the appropriate percentage should be 50%. The amount is discretionary and reflects the skill, care and responsibility required in a particular matter: see Brennand v Hartung at [170] and the authorities there-cited.
As the authorities discussed by Refshauge J in Brennand v Hartung at [171]-[174] demonstrate, if this were an assessment, the discretion of the Registrar, as the taxing officer or assessor, would have regard to the complexity of the matter and consider matters such as how the percentage has been applied (whether to the whole bill of costs or a portion of it), and the nature of the skill level by persons doing the work against which the percentage is to be applied.
It is not appropriate for the Court, on an application to fix a gross sum, to engage in that exercise, as if the matter had proceeded to assessment and was being considered on appeal, which was the case in Brennand v Hartung. At a general level, this case was complex, and required a degree of specialised knowledge. It is important not to ignore that the allowance is also made for the responsibility involved. The derivative action proceeding was a case which was potentially worth some millions of dollars in terms of consequences, with significant governance consequences for CBL depending on the result.
I have determined not to disturb the percentage applied by CBL to the particular section of the costs claimed, but to take the consequences of that finding into account in assessing the overall proportionality of the costs, discussed below.
The costs of BDO (Qld) Pty Ltd and its subcontractor
BDO (Qld) Pty Ltd (BDO) was responsible for providing an expert valuation opinion as to the fair market value of certain shares issued to CBL’s Managing Director: see Pesec No 3 at [22]. BDO sub-contracted part of its work to Argent Group Pty Ltd, and in that regard, Mr Leck prepared an opinion concerning the total remuneration package amount payable for the Managing Director at CBL.
BDO’s costs were substantial, representing $127,247.95 in the costs claimed. Mr Pesec submitted that those costs were unnecessary and only $25,000 should be allowed.
The point made by Mr Pesec was that the majority of the costs involved in the evidence prepared by BDO was not properly characterized as costs incurred to defend an application for leave to bring the proceedings, because only a prima facie case was required. The evidence of BDO was really directed to defending the derivative action if leave was granted to commence it.
The reports of BDO and its subcontractor were read in the proceeding and detailed cross-examination was directed to the authors of the expert reports. I have not excluded the costs as they were properly claimable as expenses incurred for the preparation of evidence in the proceeding, but again, I have taken the issue into account when assessing proportionality below.
Counsel’s fees
The parties have disputed various amounts relating to counsel’s fees “where documents were drawn or settled by counsel”. Mr Pesec, through his expert Mr Harrington, suggested that such amounts were not properly claimable.
For CBL, Mr Chapman has explained why he considered the costs were properly claimable, again by reference to the scale (schedule 4, part 4.1, rule 4.10). In short, there is a distinction in made by reference to whether the nature of work of the work was carried out solely or entirely by counsel, which I accept is the correct interpretation of the wording of the words appearing in the schedule. Where documents are drawn and settled by counsel, a conference with a solicitor is unnecessary (and therefore not claimable) because counsel has done all the work. However, where documents such as affidavits are drafted by a solicitor and then settled in conference with the witness, the rule has no application.
Other reasons were given and submissions made about the Registrar’s discretion on assessment in special circumstances, but it is unnecessary to traverse their detail. It will suffice to record that I consider there to be little risk that the sum claimed would be disallowed on assessment and will therefore not exclude those amounts here.
Senior Counsel’s and Junior Counsel’s fees
Mr Pesec also objected to senior counsel’s fees for the preparation of submissions and preparation for hearing, which were $108,875.00. Mr Pesec submitted, again relying on the opinion of Mr Harrington, that the costs to prepare the submissions and to prepare for hearing were a little excessive, equating to just over 16 full days of senior counsel’s time based on a 10-hour day. It was submitted that a more appropriate figure was $65,000, based on 10 full days of senior counsel’s time for a hearing that, although conducted over four days, was only three full days of hearing time.
Other issues taken with the amount related to the description on senior counsel’s invoice of a “brief on hearing” fee as opposed to charging an hourly rate. Mr Pesec also submitted that six full days spent preparing submissions in reply was excessive, and that only four should have been spent.
The complaints made about the fees of junior counsel were directed to junior counsel’s involvement in preparing for a costs application where only senior counsel appeared.
It is here that the costs expert is at some disadvantage. Acknowledging their experience and expertise when reviewing the figures, it is no substitute for the knowledge and experience of the trial judge involved in the case.
None of the objections to counsels’ fees has any substance. The derivative action proceeding was vigorously contested with a significant number of lay and expert witnesses. Unlike the representation for Mr Pesec during that hearing, Senior Counsel did not appear with a junior and was required to be fully across the detail of the evidence for each witness, as well as considering and preparing objections to evidence, cross-examination, and the individual preparation of the witnesses.
The matter was factually complex, in terms of the expert financial opinions and arguments made about them, the volume of material that was to be put before the Court and, to some extent, the facts that gave rise to the application.
The matter was also legally complex, as will be apparent from the reasons in Pesec No 3, requiring a proper understanding of various legal principles for each of the criteria to be made out under the Corporations Act and even some of the evidentiary rulings in this case required separate, detailed, consideration and argument. It was senior counsel’s role to assist the Court with all of those issues. The complexity and volume of material was commented upon in Pesec No 3 at [14]:
The three issues were addressed by the parties primarily in comprehensive written submissions. Those submissions collectively amounted to 140 pages, setting out the applicable authorities, the legal and factual controversies, and the evidence relevant to each, including transcript references. Due to the length of the submissions and the voluminous evidence, I have attempted to incorporate much of what was submitted in writing throughout these reasons without expressly summarising the arguments of each party.
The hearing was made more difficult by a change of judicial officer and intervention of an end of term break, which would have inevitably increased the time spent by counsel in preparing for a split hearing. The quality and thoroughness of the submissions that were prepared, and the manner in which the hearing was conducted, indicates the skill and dedication brought to the matter by the senior counsel involved.
I had difficulty understanding the objection to bringing in junior counsel to assist with a costs application that was argued by senior counsel. The Bill of Costs discloses that by having junior counsel prepare the submissions, that enabled senior counsel to spend only four hours, inclusive of preparation and hearing time, on the point. There were clear costs savings measures in having a junior counsel prepare the application that was to be run by senior counsel. As pointed out by CBL, the rates charged by the junior bar, and the junior counsel concerned, are generally less than the solicitor rates of the firm that was engaged for CBL. The specific complaint that junior counsel had no involvement in the matter, which led to speculation that a lot of the costs would have been spent reading into the matter, is also without foundation. There appears to be a misunderstanding as to the task that junior counsel performed. The issue was discrete and arose out of a specific costs application made by Mr Pesec. The time taken not only to review the brief but to prepare the submissions was nine hours, which reflects the discrete issue involved. There was no unreasonableness apparent in the briefing of junior counsel.
Costs claimed to prepare a Bill of Costs
Mr Pesec submitted that the preparation of a Bill of Costs in assessable form was unnecessary in the context of a gross sum costs application.
The submission was based in part on jurisprudence in this Court in Mann v Brooke [2000] ACTSC 53. Master Connolly (as his Honour then was), was there dealing with a case that had settled, and where an opponent requested an indication of costs that had been incurred with a view to negotiating a settlement of the costs payable. Rather than enter into negotiations to resolve the question of costs, the solicitor presented a Bill of Costs to the opponent and then claimed the costs of preparing the Bill of Costs on assessment. The point made in the judgment (although not in these words) was that when an attempt to negotiate costs was made, it was unfair for the party in whose favour costs were to be paid to refuse to attempt to resolve costs, spend money on preparing a Bill of Costs, and then look to the opponent to pay for that expense.
CBL submitted the Bill of Costs prepared here was not prepared in circumstances where Mr Pesec had made any attempt to negotiate costs and that any reliance on Mann v Brooke was misplaced.
I have given consideration to the affidavit evidence before the Court which included correspondence between the solicitors for each of the parties as to what occurred. The Bill of Costs was prepared by Mr Chapman with a view to supporting the attempt to negotiate the costs payable without further involvement of the Court, either through assessment or the present application. If negotiations were unsuccessful, Mr Chapman had prepared the Bill of Costs in anticipation of an assessment process. So much is clear from the anticipated costs that were included in the Bill of Costs and his statement to that effect in his second report. An attempt to negotiate costs was initiated by CBL. The offer was rejected.
Although, as I have earlier indicated, the preparation of a Bill of Costs is not usually before the Court on an application for a gross sum order, and was not necessary for the present application, it is difficult to accept an argument that the costs of its preparation should be excluded, for two reasons.
First, the default position for settling questions of costs under the Rules is that of assessment, which does require that a formal Bill of Costs be prepared. Here, the Bill of Costs was prepared:
(a)Before the present application was made; and
(b)In circumstances where Mr Pesec gave no indication that he was amenable to the quantum of costs being resolved by a means other than formal assessment under the Rules.
If the parties had proceeded to assessment, the preparation costs would have been included in the assessed costs.
Second, having prepared the document for a different purpose, the subsequent deployment of the Bill of Costs to support the figures claimed and assist the Court in the present application was not unreasonable. Many of Mr Pesec’s arguments on the present application were directed to specific figures and items in the Bill of Costs, so that it cannot be said that the document was irrelevant to the application. To direct attention to whether it was unnecessary in light of the parties’ subsequently agreed position to pursue a gross sum costs order ignores the context in which it was prepared and wrongly views the preparation of the Bill of Costs with the lens of hindsight.
Anticipated costs
Mr Pesec argued that an amount in excess of $45,870.85 of anticipated costs were not claimable because of the process being undertaken to fix costs rather than assess them. As such, the fact that those anticipated costs will not have to be incurred must be factored in when determining the appropriate amount that should be fixed.
CBL has agreed that an amount of $10,115.47 in respect of anticipated costs should properly be deducted, but resists the submission that any further reduction should be made.
I prefer Mr Chapman’s calculation of the anticipated costs that ought be excluded, as he has set out the basis for the figure reached. The conceded amount of $10,115.47 will be excluded.
Proportionality
Mr Pesec contended for a general 15% reduction to the remainder of the costs that are claimed. CBL submitted that there was no reasoned basis on which to apply the arbitrary discount and no warrant for such an approach in principle or authority.
It is worth recalling s 5A(2)(e) of the Court Procedures Act. The Court has an obligation to approach the current task with an objective of ensuring that the resolution of disputes is at a cost that is proportionate to the importance and complexity of the matters in dispute.
As I understood Mr Pesec’s submission, the discount was directed to his argument about proportionality and the complaint about the level of the resources that were devoted to the claim that was brought. It was submitted that there was no bar to a party choosing to take a sledgehammer to crack a nut (figuratively speaking), but that this choice should not be visited entirely upon the opponent when an adverse costs order is made.
Contrary to the submissions made by CBL, I consider that the principle being advanced has some support in the very existence of the scale of costs under the Rules, which reflect that whatever commercial rate a solicitor may charge the client (who has a choice as to who to engage and what resources to devote to litigation), that commercial rate is not recoverable as against an opponent.
The consequence of that system is that a degree of proportionality is already built into both the assessment process, as well as the application here. That is because the evidence on this application was not based on presenting the solicitor and client invoices and discounting the figures. Instead, CBL started from the premise of claiming only the costs that would have been recoverable under the scale provided for by schedule 4 to the Rules.
That is a partial answer, but it does not fully address the overall work that was done to answer the application for leave. CBL argued that the nature of the statutory criteria meant that the evidence led in the application for leave necessarily overlapped with the arguments to be made if leave had been granted. Accepting that to be the case, it is nevertheless apparent that the resources devoted to the derivative action leave hearing overall and certain issues in particular, were excessive. An example is the resources devoted to whether there was a serious question to be tried, in light of the relatively low threshold that was required to be overcome (see Pesec No 3 at [35]-[45]).
That has been somewhat ameliorated by the costs order that was made. CBL is only entitled to 75% of its costs of the proceedings for the reasons set out in Pesec No 4 at [32]-[33]:
32. I am mindful that this was the one statutory action, which had a number of mandatory elements. By analogy, a case in negligence has elements such as breach of duty of care and causation. A plaintiff who succeeds on breach but not on causation, and therefore fails to establish the tort, would not commonly be relieved of paying the costs pertaining to proof of the breach merely because success was obtained on that element.
33. However, even with that caution in mind, having heard the case – including dealing with the entirety of the evidence and the parties’ collectively lengthy submissions on the substantive issues – my impression of the entirety of the proceeding has led me to conclude that the fair and just outcome on costs does require some recognition of the issues on which the plaintiff succeeded. In my view, the dominance of those issues across the evidence, argument and hearing time is sufficient to displace the usual order as to costs. The just outcome is to award CBL seventy-five per cent of its costs.
Some of the issues on which CBL was unsuccessful, resulting in a reduced costs order that was fashioned by reference to a percentage, were the same issues where considerable, perhaps excessive, work was done in terms of the evidence led and arguments made. However, because of the earlier approach taken, which was not to deal with the costs of the case on an issue-by-issue basis, I am concerned that any further significant discount would go beyond what is fair and reasonable.
Ultimately, in applying s 5A of the Court Procedures Act, a small adjustment has been made to the final figure in recognition of what is appropriate to achieve a costs outcome that is proportionate to the matter, which also gives some recognition to the earlier arguments about care and conduct and expert evidence.
Conclusion in relation to the order made on 19 August 2021
Drawing the above findings together, the total amount referable to the derivative action proceeding and the order of 19 August 2021 is $356,000.00.
The costs payable pursuant to the order made on 30 September 2021
The costs claimed by CBL are $31,332. Mr Pesec submitted that a figure of $25,000 was appropriate. The reason for the reduced sum was in part because Mr Pesec argued for the Court to take account of CBL’s failed application for indemnity costs, which was not specifically carved out from the orders made on 30 September 2021. Mr Pesec argued that it would be unfair to require him to pay the costs of an application by CBL that was unsuccessful.
On this aspect of the proceeding, the costs may at first seem disproportionate, given that $21,000 in professional costs and $10,332 in counsel’s fees was spent on a question of whether to overturn a previous costs order. But there was also a degree of complexity in that application, as might be appreciated from perusing the reasons in Pesec No 5. I accept that the effect of the order made in Pesec No 6 is that Mr Pesec will incur a liability for an application that was heard separately (on the papers) and on which he succeeded and there is some unfairness involved in that result.
Ultimately, the parties are disputing $6,332 on a gross sum costs application. In the context of this application, the lump sum for that order will be fixed broadly at $28,000.
The costs of the application for leave to appeal
CBL sought a fixed sum by separate application, relating to the application for leave of $73,461, made up as follows:
(c)$54,200 in professional costs and
(d)$19,261 in disbursements (including counsel’s fees).
There was no formal bill of costs in relation to the Court of Appeal’s order. Mr Chapman based his opinion as to the amount claimed starting from what was charged in the tax invoices issued by Clayton Utz, deducting amounts that were not considered to be fair and reasonable, and applying further discounts to the result based on Mr Chapman’s experience in preparing the previous Bills of Costs.
Mr Pesec submitted that the sum ought to be fixed at $44,538.14. He argued that there appeared to be duplicate work by solicitors and that, in circumstances where the fees of senior counsel were in the order of $20,000, the fees charged by the solicitors were excessive. A similar amount for professional fees to that charged by counsel was the correct measure.
In the exercise of the jurisdiction of the Court of Appeal and applying the same principles as those set out above in relation to the appropriateness of fixing an order for costs, I consider that $66,000 appropriately reflects a fixed sum that is proportionate to the application for leave, having regard to the grounds of appeal raised, the one day of argument before Crowe AJ, and the nature of the present task.
In that regard, there were a number of grounds raised on the appeal (see Pesec Appeal) which would have required reference to a significant amount of the voluminous material that was before the Court at first instance. Contrary to the submission of Mr Pesec, a concise judgment is no measure of what might have been done behind the scenes by way of preparation and submission in order to bring about that result.
Conclusion
For the above reasons, a gross sum order will be made. The amount will be fixed in the sum of $450,000, being the total of each of the individual fixed amounts recorded in the findings made above ($356,000 + $28,000 + $66,000).
As to the costs of the applications to make a gross sum costs order, I consider that, in light of the result, each party should bear their own costs of the applications.
The orders of the Court are as follows:
In proceeding SC 179 of 2020
1.A gross sum costs order is made in the sum of $384,000.
2.Each party is to bear their own costs of the application filed 10 May 2022.
In proceeding CA 18 of 2021
1.In proceeding CA 18 of 2021, a gross sum costs order is made in the sum of $66,000.
2.Each party is to bear their own costs of the application treated as filed on 10 May 2022.
| I certify that the preceding one hundred and sixteen [118] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Acting Justice McWilliam. Associate: Kristen Cummings Date: 9 September 2022 |
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